50 stocks to buy in May

Related topics: economy, StockScouter, gold, energy, dividends

Midway through earnings season, quarterly profits are on track for a seventh consecutive double-digit gain. But the quality of those earnings is being debated.

Optimists say profits are better this quarter than they've been in the recent past because they're based more on revenue growth and less on cost cuts.

Those making the glass-half-empty argument point out that temporary tax breaks are goosing profits, and companies are sowing the seeds of shrunken profits by raising prices in response to higher commodity costs.

• What's ahead for the stock market

Higher gasoline prices are also squeezing customers at Wal-Mart Stores (WMT, news) and other retailers, and shaking confidence in the economic recovery.

Less consumer spending is the main reason for a sharp slowdown in the economy in the first quarter. But Federal Reserve officials said the tepid 1.8% gain in first-quarter gross domestic product was largely the result of "transitory" issues in the United States and elsewhere, and they expect GDP to accelerate in the second quarter.

MSN Money's StockScouter tool has generated a list of 50 stocks whose business fundamentals, price behavior, valuation and stock-ownership characteristics appear to predict a rising price this coming month, based on how those factors have influenced stock prices in the past.

Here are StockScouter's best investment ideas for May:

Put StockScouter to work

Investment research firm Gradient Analytics uses StockScouter to create daily and monthly stock lists. Writer Jon Markman, at the time a columnist for MSN Money, collaborated with the company to devise strategies for putting the tool to work.

One of Markman's strategies involved investing an equal amount of money in each of the stocks in the computer-generated portfolio, selling them six months later, then beginning the process again. For investors who prefer to handle fewer stocks, Markman recommended using the strategy with just the top 10 stocks on the list.

An investor who followed Markman's 10-stock strategy since it was launched would have realized a gain of 693% through March 31, according to Gradient Analytics, and had an average annual return of 23.4%.

Over the same period, the Standard & Poor's 500 Index ($INX) rose by 9.5%.

An innovative mix

StockScouter depends on advanced mathematics and software and an innovative mix of measurements and historical testing to forecast the short- and long-term outlook for all U.S. companies that have traded on the major exchanges for at least the past six months.

The analytical tools are applied to score stocks on fundamental, valuation, technical and ownership components.

This score is combined with each company's StockScouter rating to come up with the list in the above chart. Only stocks with a final closing price above $3 are eligible for the list.